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Pension Funds and The Flight to Quality

Shayne McGuire is the head of Global Research & Portfolio Manager, GBI Gold Fund for the TRS (Teacher Retirement System of Texas).  TRS is the 8th largest pension fund in the U.S. and controls assets worth over 91 billion dollars.  Their web site offers this dated overview:
TRS has been serving the needs of Texas public education employees for more than 70 years. In November 1936, voters approved an amendment to the Constitution of Texas creating a statewide teacher retirement system. With the passage of enabling legislation passed in 1937, TRS was officially formed.

TRS is the largest public retirement system in Texas in both membership and assets. The agency serves more than 1,273,582 participants – 988,968 are public and higher education members, and 284,614 are retirement recipients. As of August 31, 2009, System net assets totaled approximately $87.7 billion.
Mr. McGuire recently presented at the LBMA 2010 Conference, speaking on why big pension funds should now consider adding gold to their portfolios as an asset class.  Running through these numbers might make even Peter Schiff's eyes bug out.

McGuire points out some of the reasons for the attraction to gold as follows (italics, mine):
  • Pension funds currently have very small gold holdings (some may have none at all)
  • Gold has a proven diversification benefit
  • Gold provides reduced portfolio volatility (also see World Gold Council post)
  • Gold appreciates when other assets don't 
  • Gold is still regarded a commodity, but it is behaving differently (like a solid currency?)
  • While Gold ETFs have exploded the market remains "minuscule".
  • Attitudes toward gold as an asset are improving dramatically.  (and ever more quickly)
Smelting McGuires' presentation down to a single statement in my mind, I simply end up with: "flight to quality".   Gold, by default, has always been (and is) the most important form of money -- when all else fails there is still gold and silver.  Many will argue against this statement, and I myself do not believe in returning to a gold backed currency standard, but when confidence goes from bad to worse, everyone (including the Central Banks) still runs to gold.

If the world's largest pension funds and insurance companies made room in their portfolios for "N" percentages of gold, one could only believe that this demand would drive the price of gold much much higher. 

From the McGuire presentation, we see that global pension funds now total $24 Trillion in assets. (Paying no attention to the additional $18 Trillion in insurance funds for this discussion.)   Hypothetically, if the average of all the gold added to these these funds in the next years increased just by one-half-of-one-percent (.005%) of the funds value that would require over $100 Billion in yellow metal (or around 3000 metric tonnes).

First one to the order desk gets the best price!

If pension fund managers were really smart, (as in never trust a bankrupt government smart), pension funds would pay a premium for secure storage and hold bullion assets instead of paper.    I have to believe that these pension management teams know what insane shenanigans are happening in the paper markets (HFT, Flash crashes, POMOs, accounting irregularities, paper backed by toxic assets, etc.).  To believe that the paper markets aren't insanely risky right now, is like believing the the FED supports a strong dollar.

Where gold goes silver goes too.  Silver prices would also be dramatically influenced by pension fund purchases of gold, as it is always factored along with the gold equation.  This is esp. the case since one hundred million ounces of gold (3000 metric tonnes) might require a few "temporary" supply chain "gaps" to be filled in the bullion markets.  If  it were even physically possible to deliver that amount of gold (without the price going to 5 digits), at one half of one percent of total fund assets, combined pension fund gold holdings would knock the IMF out of the number 3 world gold holding slot, leaving only Germany and the US government with more tonnage (if you believe the US still have any that is not tungsten grilled cheese).

Let's see the COMEX deliver on those orders, or better yet: let's see the JPM price suppression team short to cover them.

Pension Funds! Chirp! Gasp!

You can download a PDF of the McGuire LBMA conference presentation here, or by clicking on the title of this post.

The MUST WATCH Financial Times interview with Mr. Shayne McGuire is here: FT's video interview with Shane McGuire

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